Kim says: "I’ve fumed about the strategic errors that have got so many firms into the mess in which they now find themselves, but I guess you might like some idea how to get out of a hole? I recently gave a short session on one approach to this with a class of 50 senior execs, and was reminded about a project I did to help a company dig itself out of trouble last time round, after the 2001/02 debacle.
In summary, the principle is that - like Starbucks [see blog post
] - management rushes into over-expansion in good times, chasing more of those high-spending customers, launching more products and services to sell them, and adding capacity and staff to make it possible. In the process, they add quantity to these four resources, but don’t notice the falling quality - especially lower-spending customers, and products that don’t add sufficient truly incremental sales and margin.
The end-result is a bloated business that just about stays in the air while market conditions are good. When things get tough though, the chickens come home - marginal customers and products collapse into loss-makers and you are left carrying the heavy staffing and capacity costs. How to dig out of the hole?
Well - not by across the board cost-cuts and sackings [a friend told me of a star exec at HSBC fired at the cost of 18 months' salary, when his expertise will be desperately needed within 9 months!]. You need to ‘re-architect’ the business back to a healthy core that is both profitable and capable of re-energising its growth. That’s what the article explains [only in simple terms of course - there's much more detail to doing it in practice].
So it’s not a question of cutting back, so much as cutting out - gardeners amongst you might think in terms of ‘pruning’ - cutting out weak and diseased branches so the plant can put all its energy into its strongest limbs."